Can Compensation Be Strategic? a Review of Compensation Management Practice in Leading Multinational Firms

Compensation is a key element of the employment relationship and, in addition to being the single greatest operating cost for many organizations, it has been advocated by some recently as a tool for enhancing organizational performance and sustained competitiveness. Contemporary approaches to compensation emphasize the importance of aligning employee behaviors to the strategic direction of the organization. Such approaches – broadly labeled strategic compensation, have become widely adopted by organizations. Yet our understanding of the nature of strategic compensation management is limited. Though strategic pay has been the subject of considerable academic and practitioner attention, it is argued that orthodox theories of strategic pay have a number of important shortcomings. Moreover, it is argued that there is much empirical evidence with which to challenge the received wisdom of strategic approaches to compensation. In exploring the use and effectiveness of strategic compensation in leading organizations, the findings of the study that forms the basis for this paper reveal that many organizations experience profound managerial difficulties when attempting to use compensation strategically. As a result, realised compensation practice often reflects neither what was desired strategically nor intended as policy. Often reflecting a poor fit for the organization, negative outcomes of strategic compensation systems include high costs, a greater administrative burden and industrial conflict manifest in a demotivated and disengaged workforce. More significantly still, the mismanagement of strategic compensation systems may induce undesirable employee behaviours resulting in unintended consequences that are often discreet and therefore difficult to remedy. In this sense, compensation clearly is important, but not as the value-creating activity purported by exponents of strategic compensation. Rather, it is a business risk that requires careful management and good governance to ensure that it does not diminish or consume more value than it creates. Theoretically, the study highlights a number of limitations of managerialist accounts of strategic compensation, and points instead to the importance of additional powerful, but currently underdeveloped, theory. Contingency and neo-institutional accounts of firm behaviour are seen in light of the empirical data to be particularly relevant and worthy of further research to enable a greater understanding of this important economic and social aspect of organizational behaviour.